Market Shaken by Consumers’ Spending Spree

WASHINGTON — A slew of robust manufacturing and consumer spending data rattled U.S. financial markets Friday ahead of a key Federal Reserve meeting next week on interest rates.

With the Fed’s policy-setting Federal Open Market Committee scheduled to meet Tuesday, the National Assn. of Purchasing Management said manufacturing activity surged ahead in September and its prices component jumped.

The Commerce Department said consumers were on a shopping spree in August, spending at the strongest clip in six months. Another report showed U.S. consumer sentiment surged to its highest level in three months in September after slipping during the summer.

The reports sent stock and bond prices tumbling as investors suddenly grew worried that the U.S. central bank might see the potential for economic overheating that could fire up inflation.

The bellwether 30-year U.S. Treasury bond plummeted more that a full point. Its yield, which moves in the opposite direction, surged to 6.13% from Thursday’s close of 6.05%. The Dow Jones industrial average slid 63.95 points, or 0.6%, to 10,273.00.

“It potentially raises the specter of a rate increase on Tuesday,” said Thomas Galvin, chief investment officer for Donaldson, Lufkin & Jenrette Securities Corp. in New York.

Other analysts said Federal Reserve Chairman Alan Greenspan has not done his customary preparation of financial markets for a rate hike, and they expressed doubt that one will come as early as next week.

“The [FOMC] may give Chairman Greenspan authority to move on his own before the next meeting on Nov. 16,” said economist Allen Sinai of Primark Decision Economics Inc.

The purchasing managers group said its index of manufacturing activity climbed to 57.8 in September from 54.2 in August, with both orders and production showing strong gains.

The prices-paid component, a gauge of potential inflation, jumped to 67.6 from 59.8 in August--its highest reading in more than four years--as 14 out of 20 industries said they had to pay more for raw materials last month.

The Commerce Department said consumer spending on new cars and other goods and services surged at a 0.9% annual rate in August to $6.253 trillion. That was more than double July’s 0.4% gain, for the strongest increase since a matching 0.9% gain in February.

The boom in consumer spending, which fuels two-thirds of national economic activity, implies a strong bounce-back for economic growth after a lackluster second quarter.

“Consumers seem to have a real favorable opinion of the future, of the economy, their jobs, etc.” said Jennifer Rossum, an economist at Stone & McCarthy Research Associates in Princeton, N.J.

The University of Michigan’s consumer sentiment index rose to 107.2 in September from 104.5 in August, according to sources who have seen the report, which is released twice a month to clients.

They said the reading was the highest since the index hit 107.3 in June and just slightly below its recent peak of 108.1 in February.

Another government report, also from the Commerce Department, showed August construction spending fell 0.4% to $692 billion after a 0.6% July decrease. But it was overshadowed by the signs of strength in other reports.

The Friday data are the last the policy-setting committee will see before its Tuesday session.

“It would seem only logical that they take out a little more insurance and up interest rates on Tuesday,” said economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa. Even if they hold off next week, eventual rate hikes are likely, he added.

The Commerce Department said personal incomes rose 0.5% in August to an annual rate of $7.542 trillion, an eighth straight monthly increase, after a 0.2% pickup in July.

* INFLATION FEARS

Bond yields climb and stocks fall amid signs of new inflation. C2